Feature: Still Taxing Times for UK Gaming

The future of the UK video games industry looked much rosier in March when the previous Labor government pledged to introduce a tax credit to help the sector compete on the world stage. Despite British studios contributing around £1 billion a year to the economy and creating hundreds of jobs, the new Conservative/Liberal Democrat coalition government refused to include the measure - which would work broadly similar to the film industry tax relief - in the emergency Budget in June, after being unconvinced by its benefits. Undeterred, industry trade body Tiga has continued its lobbying onslaught to convince the government that Britain's position among the gaming elite is under threat from Canada, France and other industries that have been fuelled by state support. After investigating the issue just over a year ago, Digital Spy returned to examine the current state of play, including why the battle for a tax credit is far from over.

New research released by Tiga gives an eye-opening snapshot of the problem facing the UK gaming sector, with British studios enduring significant volatility over the last two years. Between July 2008 and September 2010, the number of games companies actually increased from 264 to 278, but over the same period 131 firms shut their doors. The most notable recent closure was Scottish studio Realtime Worlds, maker of crime MMO All Points Bulletin, which collapsed with reported debts of £3m, leading to more than 150 job losses. Overall, the sector's headcount has fallen by 9% since 2008, while in contrast the Canadian industry's employee base has grown by 33% over the same period.

Tiga continually points to markets such as Canada, Germany and France for comparison as this is where state financial assistance has had such an impact. Canada had a very modest games industry until a few years ago, when a small amount of tax relief from the government stimulated a vibrant sector that now boasts development presences from Electronic Arts, Ubisoft and other major publishers. Nikki Dixon, a partner at accountancy firm Grant Thornton, reflected on the fact that a delegation of Canadian gaming firms was heading over to the UK this autumn to showcase their businesses to prospective creative talent. Grant Thornton, which has partnered with Tiga to build the case for the tax credit, believes that this is a telling sign of the challenges facing Britain.

"We are in a global business and we need to think in a global way. We have to respond to the fact that people will move," she said. "We need to have a really competitive marketplace in the UK and we are working with Tiga to get clarity on the tax regime. What we actually need is to know is what's going to happen in the next five years, and not have a guessing game. Business doesn't plan for the next six months, it plans for the next few years. We will continue to work to put forward clear and transparent proposals that will help this industry to create jobs in the UK."

According to TIGA's calculations, the tax break would cost the Treasury around £54m in lost taxes in its first year to cover existing and new projects, dropping to around £35m for subsequent years (significantly less than the £104m of relief given each year to the UK film industry). Over a five-year period, Tiga estimates that the credit would generate 1,400 new jobs and lead to £146m of fresh investment in British studios. It would also bring £133m of direct and indirect annual tax revenues to the Treasury and make a GDP contribution of £323m. The credit has gained support from major publishers such as Activision Blizzard, but the coalition remains unconvinced by Tiga's case.

John Whittingdale, the Conservative MP who chairs the culture, media and sport committee, said that the credit was turned down in June "partially due to the financial climate", but insisted that the battle is not lost. Whittingdale, a committed supporter of the games industry, said that Tiga has succeeded in persuading parliamentarians that the sector "is not just about spotty teenagers in bedrooms, but actually about a huge industry that everybody is involved with in some way or the other". He also acknowledged the "real danger" posed by overseas industries and pledged to keep pressure on the government to champion the UK sector.

"We will go on trying to make the case that giving support to the games industry in the same way that the film industry enjoys, is actually in the long-term interests of the UK economy," said Whittingdale. "By promoting and supporting the industry in this country we will be at the forefront of technology and will deliver a long-term return to the Exchequer. That is a case that the Treasury requires a lot of convincing on, but I can promise you that we will be doing our best to ensure that the case is made."

Labor MP Tom Watson, another vocal supporter of Tiga's cause, accepted that the gaming tax issue is now in a "holding pattern", but stressed that it won't be like that forever. Watson claimed that Tiga made a "very powerful case" for the tax credit and it was "no mean feat" to get the measure through the Treasury in the final year of Gordon Brown's administration, when every new spending pledge was being scrutinized intently.

"The prevailing political climate has meant that the credit is not going ahead, but that won't last forever. The real case that I want to make to the industry is not to lose heart, but also don't stop making the argument so that you are ready for that policy shift whenever it happens'," he said. "You must make sure that you are there with your model and case, your supporters and allies when there is a shift in the view of the world. It's not easy but there is also not a lot of choice either."

Watson said that the debate on the gaming tax credit in parliament was the first time that the strategic importance and growth potential of the industry was recognized by politicians, as though some "giant mountain" has finally been put on the map.

"If you look at the debate, you would think that it was some sort of seismic struggle between good and evil," he said. "But now they all realize that it's an important cultural medium, its part of people's lives and there is a big jobs market behind it and it's one of the world leaders; so it's about what can we do to help. The metrics have changed and that is really important. That is down to the trade bodies [such as Tiga] making the case with steady day-to-day communications that isn't particularly sexy but is really important."

In July, culture minister Ed Vaizey said at the Develop conference in Brighton that the government remains committed to the UK games sector, despite the lack of firm financial assistance. Tiga has maintained constant contact with Vaizey - who backed the credit while in opposition - to keep pushing the tax relief agenda, but Watson believes that it is "very hard to deliver on some of the promises you make as a junior minister at the department for culture, media and sport if you haven't got support of the Treasury or Number 10". While keen to avoid making the issue party-political, Watson believes that the argument put forward by the Tories to avoid introducing the tax credit was a "spurious one".

"They are saying that it's not effective or that they are not sure it's targeted enough to really work, but I think actually there is a bigger problem in that ideologically they don't believe that government should be in this space. I think that they should just be honest about that, at least then people will know where they stand," he said. "Ed Vaizey is a pragmatist but he's up against the machine. I admire his valiant efforts to engage the industry and try to offer hope but I would imagine that he is in the same space as I am, which is that the industry has got to make some noise about this. If they make enough noise, then at least it equips him with the ammunition to make an argument within government."

Watson added: "You have also seen a change in Labor as well, they understand that the industry is strategically important. Some people still don't believe that it's a modern art form that is going to be the dominant cultural force of this century, like I do, but there are quite a few who do. A lot of the new intake [of MPs], like Luciana Berger in Liverpool, understand the industry inside out and they are going to be running my party in the next ten years. I think the future is very hopeful, we have just got to get through the next two to five years."

At a recent games industry networking event, the talk among organisations revealed mixed feelings about the sector's future. Representatives from universities running gaming-focused courses said that applications are consistently high, but that will surely be linked to perceptions of attractive jobs waiting at the end. Meanwhile, some people working in the commercial industry expressed concern that the sector was not growing at a sufficient pace. Despite being in the top five markets in the world, the UK produces very few genuine, mass-selling AAA titles, with Fable III possibly the only recent example. There is also a lack of publishers expanding to major league status, meaning there is plenty of work still to be done beyond the tax credit.

Tiga chairman Richard Wilson said that he was "very pleased" that the organization was able to change the government's fiscal policy during the recession with the tax credit case, when few other sectors were so successful. Wilson believes that there is support across all the main political parties for the measure and he is "supremely confident" that it will eventually be pushed through. In the mean time, Tiga will maintain a three-pronged strategy of lobbying government, increasing the industry's media profile and promoting innovation across the sector. Tiga's new research indicated that of the 145 new companies to enter the market in the last two years, 80% have been focused on the emerging methods of digital distribution, indicating that developers are working hard to unlock fresh revenue streams.

"In recent years, a range of new platforms and business models have given games companies more flexibility," said Wilson. "Driven firstly by the rapid growth of the iPhone games market and then more recently and most significantly by Facebook and the social network games market. Games studios in this space often have a higher potential to be stable and profitable, better able to raise finance, create original new games, retain copyright and attain greater financial stability. Network gaming grew in 2009 to represent 38% of the global video games market. Today, the largest games audiences and fastest growing games companies the industry has ever seen are in network gaming, particularly on Facebook."

Whittingdale said that one of the biggest strengths of the games industry is its ability to adapt to new business models. In his capacity as chair of the culture, media and sport select committee, he often hears the music and film industry complaining about how consumers attempting to access content for free over the internet is destroying their industries - but gaming has taken a much different tact. Whittingdale pointed to the example of Farmville, the iPhone and Facebook sensation that has more than 62m active users worldwide. He noted that US studio Zynga, the game's creator, returns a "very healthy profit" every year, but only from the 0.01% of players who actually pay to play Farmville.

"It's a business model where you accept that the majority of players are going to consume your content for free without any payment at all, but Zynga has found a way of making money from people that are so obsessed with the game that they are prepared to pay large amounts of money to play it," he said. "That is a fascinating model that may well have applications elsewhere. We are looking at ways we can sustain the creative industries and we are looking to the games industry to provide solutions in ways that the traditional industries are actually very bad at doing. We have greatly learned from the games industry, and that's why we are keen to support it."